In 1980, inflation at the consumer level (the Consumer Price Index) was running above 14 percent.

The situation was so bad that then-Fed Chairman Paul Volcker had declared war on inflation and was raising interest rates every time you turned around. The problem was that inflation had risen from under two percent in 1965 to nearly 15 percent in 1980. Thus, the CPI was in an uptrend that did not appear to have an end.

The "Inflation Problem"

Granted, with the Fed on the warpath, the "inflation problem" did abate in relatively short order and by 1986, the CPI bottomed out at an annual rate of 1.1 percent. Problem solved, right? Unfortunately though, the 1.1 percent rate seen in 1986 was the low water mark for the next 15 years.

And during that span, the CPI oscillated up and down, and was "a problem" several times from the late 1980s through early 1990s. Then just before the credit crisis took hold in 2008, inflation was once again "a problem" as the CPI moved back above 5.5 percent.

The Fed's target for the CPI is right around two percent. Inflation problems occur when the CPI moves above the three percent mark or so.

However, there is an awful lot of talk these days about a new kind of inflation problem — [size=13px; ]as in not enough. That's right, after worrying about the vagaries of runaway inflation for the past 40 or more years, the members of the FOMC are now worried that the economy doesn't have enough inflation.[/size]

On several occasions FOMC members have talked about this new inflation problem. Heck, just yesterday, St. Louis Fed President James Bullard suggested that the Fed wouldn't make a move until inflation perked up a bit. “The Committee would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there,” Bullard said.

If this sounds a little off kilter, join the club. After all, lots and lots of smart folks continue to fret that the Fed's current ZIRP (zero interest rate policy) and QE programs are sure to spark a serious bout of inflation in the future. And as history has shown, once inflation starts to roll, it can be tough to stop.

Ben Bernanke's Concern

However, Mr. Bernanke appears to be more concerned about the other type of inflation problem — [size=13px; ]deflation. While the 50-year chart of the CPI only has one brief blip where the annual rate of change was negative (during the credit crisis, the annual rate of change for the CPI went to -2.1 percent), Gentle Ben appears to remain steadfast in his desire to keep the U.S. out of a Japanese-style deflationary spiral.[/size]

Given that the Japanese economy has been plagued by deflation since 1989, Bernanke knows that once deflation sets in it can be even harder to stop than the so-called runaway inflation seen in the U.S. during the 1970s. He has a point. The Fed has proven that it can choke off inflation by hiking rates.

However, up until Abenomics was put into effect this year, Japan had tried throwing everything but the kitchen sink at the deflationary spiral, all to no avail. (For the record, Abenomics calls for throwing the kitchen sink, the cabinetsand the counter tops at the problem this time.)

In the old days, one had to read between the lines of whatever the Federal Reserve said (remember the days of the Greenspan "briefcase indicator?"). There weren't statements accompanying rate decisions, press conferences or the never-ending stream of open mic sessions we have today.

The Fed chairman didn't do interviews on "60 Minutes." To be sure, the current Fed is by far the most transparent ever. However, the lip service being paid to the idea that inflation is currently too low might just turn out to be a smoke screen.

While this may be just an opinion, it appears that all the talk about inflation being too low is "cover" for the FOMC to continue to pump money into the U.S. economy. You see, up to this point, Mr. Bernanke has erred on the side of caution with regard to economic stimulus.

Each and every time Europe's crisis interrupted the fragile recovery, the Bernanke cavalry would mount up and ride to the rescue. It appears that Mr. Bernanke isn't about to change his stripes at this point in time. Especially now that he knows he will have a new job come next January.

Delayed Taper?

IF (note the use of all capital letters) talks about inflation being "below the Fed's target" or further discussions of deflation continue, this may represent justification for the Bernanke Fed to avoid taking their proverbial feet off of the gas pedal too soon. So, IF the data continues to come in mixed and IF that is correct, the new inflation problem might mean that the much ballyhooed QE "taper" could begin later than currently expected.

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